Sustainability strategy and risk-management

Manufacturing companies in the Kazakhstan market introduce new developments in the field of applied technologies and materials. With the use of each new substance and technology in this area, the risks also increase. This increases the importance of risk management as part of a sustainability strategy and requires more experience and knowledge. Thus, the purpose of the dissertation research is to develop proposals for ensuring the sustainability of industrial companies based on the use of risk management. It is necessary to gain knowledge of best practices in the industry to provide further research on this issue that can improve risk management strategies and the sustainability list. This dissertation examines the modern theory of risk management and sustainability strategy, which highlights trends in the development of the industrial sector.

Keywords: sustainability, strategy, risk management.

Компании-производители на казахстанском рынке внедряют новые разработки в области прикладных технологий и материалов. С использованием каждого нового вещества и технологии в этой области риски также возрастают. Это повышает важность управления рисками как части стратегии устойчивого развития и требует большего опыта и знаний. Таким образом, целью диссертационного исследования является разработка предложений по обеспечению устойчивости промышленных предприятий на основе использования управления рисками. Необходимо получить знания о лучших практиках в отрасли, чтобы провести дальнейшие исследования по этой проблеме, которые могут улучшить стратегии управления рисками и список устойчивости. В данной диссертации рассматривается современная теория управления рисками и стратегия устойчивого развития, в которой освещаются тенденции развития промышленного сектора.

Ключевые слова: устойчивость, стратегия, риск менеджмент.

Sustainability as a subsystem of the economy and its management is an important factor underlying the sustainability strategy of Kazakhstan national economy, since industrial enterprises initially have a significant impact on all elements of the country sustainability and deserve priority study when developing this problem.

In this dissertation, we propose to consider a model for ensuring the stability of an enterprise at all risk management levels, presented based on a classification of internal factors, which will allow us to build new approaches to risk management in such companies in the modern market. This should help enterprises achieve a higher level of business activity, if their goals are easily integrated at the local, regional, national or global levels in the direction of their sustainability, taking into account the specifics of oil and gas industry that significantly affects the socio-environmental sphere.

Relevance of the research topic . In advanced administration hypothesis, issues of key administration and models of investigation and decision-making in particular operational issues of companies` working have been completely created. They work well in stable, established conditions. However, in crisis situations or during a stagnation period, companies’ activities are accompanied by increased instability and risks, and their economic stability decreases. To minimize threats and risks, it is vital to modernize the key framework and operational administration, rummage around for shapes and strategies to guarantee the companies economic stability.

The purpose of the dissertation research is to develop proposals for ensuring the industrial companies sustainability based on the use of risk management.

This dissertation paper defines the content of the company’s sustainability, which is manifested in the company’s ability to maintain market positions and maintain the operation planned mode without administrative interference from the state, despite external and internal threats and risks, and create a basis for further development. It is proved that the main danger of reducing the companies’ sustainability, which leads to the greatest losses and economic losses, is the lack of accounting and unreliability of risk assessment of strategic, as well as risks in the socio-economic and managerial spheres. Taking into account only traditional risk factors significantly limits the ability to determine the real level of sustainability.

Literature review

According to the definition of Francois Perrou, a French economist (1903, 1987), economic sustainability corresponds to «a steady increase over one or more long periods in the measure of a nation’s total net product in real terms» [1]. It measures the wealth produced in a territory over a year and its evolution from year to year, so it gives little information about the standard of living and even less about the quality of life. Sustainability can contribute to development, but it is not always so, and we are talking about growth without development, when the wealth production is not accompanied by an improvement in living conditions. Strictly speaking, sustainability only describes the process of increasing economic production. On the other hand, Perroux defines development as follows: «a combination of mental and social changes in a population that make it able to cumulatively and sustainably increase its real total product» ¹ .

The World Bank, for its part, defines sustainability as a combination of the following characteristics: self-sustaining and sustainable growth, structural changes in production methods, i.e. a reduction in dependence on materials, raw materials and goods and services production, technological catch-up, social, political and institutional modernization and significant improvement of people’s living conditions [4].

Data analysis

Analysis of sustainability of industrial companies in Kazakhstan

In modern practice, economic and mathematical methods of evaluating phenomena are becoming more widespread. With their help, we can get a quantitative characteristic and find numerical criteria for the phenomenon under study. However, it is very difficult to measure such a multi-faceted concept as a company’s sustainability within the framework of a mathematical approach, if only because it is extremely difficult to quantify the each factor value that has a positive or negative impact on the company’s sustainability. It is even more difficult to obtain an integral assessment of the company’s sustainability, given the heterogeneous factors influence. In addition, most importantly, the very characteristics of factors that affect the company sustainability are subjective, depending on the views, preferences, and experts qualifications who evaluate the factors, as well as their place in the company’s management system.

The need to analyze the company’s sustainability in the legal sphere is determined by the fact that any company operates within certain legally defined limits. General business rules define national laws, and bylaws interpret laws in practical terms. In addition, companies operate within the framework of administrative regulations on the provision of information and state secrets protection, state standards, and moral restrictions. State supervisory and control bodies, which have been delegated the appropriate powers, issue instructions and orders within their competence.

Model description

In this chapter, we will present the study model using the analysis of information collected from the theoretical base on sustainability and risk management, companies data, and the questionnaire results.

Three major Kazakh oil and gas companies were accepted for the study. KazTransOil is the largest oil pipeline company in the Republic of Kazakhstan, providing services for transporting oil to the domestic market and for export. «KazTransOil» JSC is included into the Republican section of state register of subjects of natural monopolies. The company's strategic goal is to increase the market value and meet the state's strategic interests in the sphere of hydrocarbons transportation via the oil pipeline. Two other major oil and gas companies, Tengizchevroil and PetroKazakhstan, are subsidiaries of KazMunayGas and are the second largest in Kazakhstan.

To provide a research model, we conducted a survey among employees of the above-mentioned companies. The results were collected from 10 employees. This questionnaire on sustainable development were published in UNDP website and was made specially for Chinese companies operating abroad. It consists of four main chapters such as Corporate governance, economy, environmental and social.

Managing the company’s sustainability based on risk management

In the previous chapters, we collected information and research data on the sustainability of three Kazakh oil and gas companies. In this chapter, we will present the results of the research, propose a scheme for companies’ sustainability and risk management. The scheme we developed takes into account all the nuances that we received during data collection.

Strategic analysis tools can be used to assess discrepancies between the company’s adopted strategy and the actual market situation. These tools work well in stable, established conditions and can be used to diagnose the company sustainability.

However, in crisis or stagnation times, when the industrial company’s activity is accompanied by increased instability and risks, more mobile methods and tools are needed to diagnose sustainability. Such methods and tools can be: benchmarking, as a method of comparing a company with practically successful competitors, expert evaluation and the company’s value analysis. In our opinion, risk management can be the most effective method not only for analyzing and evaluating the company’s condition, but also for its operational impact on improving the company’s sustainability.

The risk management service thus becomes a logical addition to the company’s traditionally independent functional subsystems and should be located at the same management level with them. In these circumstances, the risk management service formation should also be formed at the highest level of the company’s management — the board of directors or the company’s management board.

The success of risk management in the company depends on the tools available to risk management in developing responses to risks in a specific economic, legal and organizational environment. Risk response tools can be divided into three classes: (a) impact on the risk source, (b) impact on the organization’s external environment (environmental measures), and (c) impact on the company itself (object, subject). The most effective responses to risks consist of combined and coordinated impacts in three areas: on the source, the environment, and the company.

In our opinion, this is not enough at all. It is necessary to constantly monitor the entire socio-economic, regulatory, technical and technological, information and management company’s environment. This is possible when creating a full-scale independent risk management service in the company. Its creation will allow not only to identify possible threats and risks, timely notice signs of their actual occurrence, but also to determine what the observed risks are, whether they will become a risk-hazard or a risk-chance.

Considering the development strategy of PetroKazakhstan, Tengizchevroil and KazTransOil for 2018–2020, the company’s board of directors instructed the company’s CEO to assess risks during this period and develop a risk management program. However, the decision of the company’s board of directors does not provide for the creation of a special service or even a division in the management bodies structure that would deal with these problems. The maximum that was proposed was to create a risk manager position in the company, whose duties would include solving such issues as:

1. development of a corporate standard for an integrated risk management system;
2. development and implementation of a system for motivating managers for risk management, development of KPIs for risk management;
3. development and implementation of the actions budgeting system for decrease in risks;
4. development and implementation of a mechanism for accounting for the impact of risks on budget indicators (formation of the company’s budget taking into account risks);
5. development of technical specifications for updating the risk information system;
6. identifying risks, creating the company’s risk map, conducting interviews with the company’s senior management on risk management issues;
7. preparing risk management reports for the company’s top management;
8. developing and documenting risk assessment methodologies;
9. risk assessment (currency, price, credit, etc.);
10. KRI development and monitoring;
11. organization of market risks hedging with production financial instruments;
12. participation in working groups on integration implementation and investment projects.

It is obvious that a single specialist, even of the highest qualification, cannot perform such a volume of work. It is necessary to create specialized divisions within the company’s management bodies. In our opinion, along with the traditional committees in the company’s board of directors, it is necessary to create a risk management committee.

The activities of the company’s risk management service should be linked to the activities of the company’s main production and functional services: accounting, finance, marketing, production, engineering, infrastructure and human resources services. To meet this condition, the risk management service must be integrated into the company’s multi-level management, technological, and spatial structure.

Concluding remarks

In accordance with the dissertation research purpose, the theoretical and practical aspects of ensuring the industrial companies sustainability are studied and a methodological approach to its complex multi-criteria assessment for making effective preventive decisions is developed. The importance of this approach is determined by the fact that it is necessary to search for optimal models and technologies for managing companies sustainability operating under conditions of uncertainty and risks.

The set of risks that accompany the industrial companies’ activities shows the urgent need to identify, rank and evaluate all risks when building a company’s development strategy.

Given the increased role of and attention to sustainability in the modern company management, the necessity of economic sustainability assessment in the framework of the increasing the company sustainability strategy. The solution to this problem is possible by developing and implementing a methodology for assessing the company sustainability, which should allow us to constantly monitor the level and dynamics of sustainability indicators, analyze them, make a comparative assessment of the company’s activities and contribute to the formulation of recommendations for making effective management decisions.

The necessary requirements are justified and a methodological approach to assessing company’s sustainability is developed with the construction of an appropriate model based on the use of a multi-criteria assessment of its sustainability. The features of the proposed model for assessing sustainability are due to the fact that it allows such an assessment to be carried out in a multidimensional manner, taking into account the most important areas of the company’s activity: production, innovation and investment, market, organizational and economic, financial and personnel, etc.

The main advantages of the developed model are:

– the developed and proposed model is characterized by a broad coverage of key performance indicators, simplicity and clarity of assessing the company sustainability, and the validity of their choice. The model omits excessive indicators, and at the same time includes factors that have a dominant influence on the company’s sustainability;

– multi-criteria assessment of the company’s sustainability helps to make better informed decisions in the processing the data of possible borrowers in order to determine the insolvency risk (based on sustainability, level of creditworthiness, etc.), to better determine the lending terms, the company sale or purchase.

The result of the study is of practical interest to experts and specialists of industrial companies in terms of maintaining sustainability in the process of achieving goals by timely identifying «problematic» aspects of the company’s activities and implementing proactive measures to prevent its bankruptcy.

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